Dollar Reversal Underway?

 |  Includes: FXB, FXE, FXF, FXY, UDN, UUP
by: Grace Cheng

What an unexpected start to the trading week. Today the US dollar advanced strongly against many currencies on the back of weaker-than-expected Eurozone data, and it wasn’t just any Eurozone data; it was the widely watched German IFO survey. Business confidence in Germany, Europe’s largest economy, deteriorated significantly in June and reached the lowest level since December 2005, with the business confidence index falling to 101.3 in June from 103.5 in May. The market had expected a reading of 102.5. Even though the headline index has worsened, the business climate indicator for the construction sector improved, but that isn’t going to make the European Central Bank happy.

The ECB is scheduled to raise interest rates in July and won’t be pleased if business confidence falls. Another Euro-unfriendly economic release today was the Eurozone PMI index which showed both manufacturing and services falling below the key 50 reading.

Speculators Net Long Dollar

For the first time in almost 18 months, IMM (International Monetary Market) currency speculators are placing their bets on a US dollar rally. According to the latest futures data, net long dollar positions (against the Euro, Swiss franc, yen, British pound, Canadian dollar and Australian dollar) stood at $2.58 billion in the week to June 17, flipping from the previous week’s short position of $2.65 billion. Adjustments could take place this week after the Fed rate announcement this Wednesday as that would give traders a glimpse as to whether the Fed is seriously considering raising rates in the near term.

You can access the latest Commitment of Traders data for all futures contracts here.

Forex Trading

The Euro fell by the biggest amount against the US dollar in more than a week, hitting an intraday low around 1.5470. Its nearest support is around 1.5440. The Euro is likely to be shielded from aggressive shorting interest ahead of the US FOMC meeting this Wednesday. USD/CHF rose to a high of 1.0490 where it met resistance. Further topside gains will depend on today’s performance of the US stock markets and oil prices. GBP/USD fell 170 pips to a low of 1.9585 after Rightmove said today that the average asking price for a home fell 1.2% from May to 239,564 pounds.

There is a lot of event risk this week, so it would be better for traders to take intraday profits rather than hold out for the week.

Economic Calendar for Tuesday:

  • French consumer spending 0645 GMT
  • Swiss UBS consumption indicator 0800 GMT
  • Former Fed chairman Greenspan speaks 1230 GMT
  • US S&P/Case-Shiller house price 1300 GMT
  • US consumer confidence 1400 GMT
  • Japan merchandise trade balance 2350 GMT